Investment managers produce annual equity return forecasts, and the consensus is much more pessimistic than that of academics. I’ll take a closer look at why the forecasts are so different and the implications for advisors working with clients.
I’ll focus on rebalancing versus buy-and-hold with a focus on retirement withdrawals.
Earlier this year, Jeremy Siegel said that, “75/25 is the new 60/40,” a recommendation to raise stock allocations to make up for lower bond yields. However, what matters for investors saving for retirement is not the asset class performance, but how those returns translate into retirement consumption.
I have analyzed data that improves our understanding of LTC needs and informs the decision-making about insurance.
I examine new research that offers a way to algorithmically determine how to draw down one’s savings.
Adoptees of bucket strategies were rewarded over the past two months, as their cash reserves buffered them psychologically from the market decline. Such strategies avoid taking withdrawals from stocks when the market is down, as it is now. But do bucket strategies provide a financial benefit – as some claim – or are any benefits purely behavioral?
Annuities can reduce the risk of running out of money in retirement, but they protect against this risk in different ways. I’ll compare retirement outcomes of SPIAs to GLWBs to understand the key product differences.
It is useful to focus on the performance of reverse mortgage LOCs, as one would for any financial investment.
I expand on recent articles by David Blanchett, Zvi Bodie and Dirk Cotton by comparing the income-generating properties of SPIAs to VAs and FIAs with guaranteed lifetime withdrawal benefits (GLWBs), and place particular emphasis on how inflation risk impacts income.
Bill Sharpe has focused the most recent phase of his career on retirement-income analysis. A big part of that work has been the creation of an online textbook covering the various subjects related to retirement planning.
The prevalent approach of saving a fixed percentage of income every year can miss the retirement target by a wide margin, but adjusting annual savings contributions can run into problems as well. Here, I’ll introduce new ways to measure the performance of pre-retirement strategies, test two new strategies and discuss the potential for more sophisticated approaches.
Should those further from retirement safely allocate more to stocks? I’ll use an example to challenge the popular notion that those with many years left until retirement can safely allocate heavily to stocks. I’ll then demonstrate that pre-retirement investment challenges are more difficult to deal with than generating income after retirement.
To develop retirement strategies, advisors need to consider worst-case outcomes due to poor investment performance. One way uses historical returns and focuses on the particular periods that produced the worst outcomes. Another way uses forward-looking estimates of future returns and Monte Carlo simulations to generate a range of potential outcomes. I’ll develop new measures to compare those two approaches and demonstrate why I strongly favor the forward-looking approach.
The popular view is that we face a retirement crisis. But receiving far less publicity are a few experienced researchers pointing to evidence that retirees are actually doing okay. I’ll sort out these differing views.
Life-cycle economics contributes two foundational concepts to financial planning. The first is that individuals and couples must accumulate savings during their working years to support themselves in retirement. The second is consumption smoothing – clients prefer to maintain a steady standard of living over the full cycle of accumulation and decumulation.
Advisors providing retirement recommendations will find it helpful to use a graphical approach to show the year-by-year progression of funds available during retirement.
Americans have under-saved and will need more than withdrawals from savings to survive retirement. An optimal withdrawal strategy and asset allocation, delaying Social Security, annuitizing, tapping home equity and possibly working longer need to be evaluated. Let’s take a typical American couple and evaluate which options improve retirement consumption.
Most research on retirement strategies assumes that people have saved adequately. But data on household savings shows that many households fall short, and will need to call on relatives or other sources for support. This raises questions about the best withdrawal or annuity strategies when savings are insufficient. It turns out that which strategy works best is different than for adequately funded retirements.
A strategy that combines variable withdrawals with partial annuitization using a single-premium immediate annuity maximizes the cash available for consumption.
Although the general concept of mortality credits is widely understood, the underlying math is not. Understanding the math can help with decisions such as the best age to purchase an annuity and which type of annuity to purchase. Such an understanding can debunk some popular beliefs about annuities.
Since the early 1980s, bond investors have benefitted from declining interest rates. But we may be turning to a future of rising rates and clients suffering bond losses. Advisors need to be prepared both in terms of investment strategy recommendations and communication with clients.
I’ve previously written articles about two separate techniques for improving retirement outcomes: the use of SPIAs and smoothing of year-to-year withdrawals. In this article I investigate ways to combine SPIAs and smoothing to produce even better outcomes. I’ll then broaden the discussion and briefly explain how SPIAs and smoothing fit into the wider context of ways to improve retirement outcomes.
Optimal asset allocations for variable withdrawal strategies are quite different from the research findings and rules of thumb based on fixed strategies. Indeed, the implications go beyond asset allocation and show, for example, that equity glide paths in retirement are relatively unimportant.